How extra payments shorten a mortgage
Each mortgage payment covers the interest charged that month first; the rest reduces the balance. An extra payment goes entirely to principal, so every later month charges interest on a smaller balance. That's why a small extra amount early in the loan saves far more than the same amount near the end.
Worked example
A $300,000 balance at 6.5% with 30 years left has a regular payment of $1,896.20. Paying an extra $200 a month pays the loan off in 23 years and 1 months, 6 years and 11 months early, and saves about $103,449 in interest.
Ways to pay extra
- Extra each month: the steadiest way to cut years off the loan.
- Biweekly payments: paying half the payment every two weeks adds up to one extra full payment a year.
- Lump sums: tax refunds or bonuses applied to principal.
Before paying extra, it usually makes sense to have an emergency fund and to pay off higher-interest debt such as credit cards.
Frequently asked questions
Is there a penalty for paying off a mortgage early?
Most home loans made today don't charge one, but some do in the first few years. Your loan documents list any prepayment penalty.
Should I pay extra on my mortgage or invest?
It depends on your rate and goals. Paying extra earns a guaranteed return equal to your interest rate. Investing may earn more over time but isn't guaranteed.
Does an extra payment lower my monthly payment?
No. With most mortgages the payment stays the same and the loan ends sooner. Some lenders will recalculate the payment after a large lump sum, called recasting, for a fee.